New York legal battle pits medical marijuana firms against state health department

A legal battle has broken out in New York over the state’s plans to double the number of medical marijuana businesses, injecting fresh uncertainty into an MMJ market already struggling to gain traction.

Four of the state’s five MMJ businesses recently sued to block the New York State Health Department from issuing the new licenses, arguing the competition could damage an industry that is operating below capacity because of a relatively small patient base.

The five new licensees would bring the total to 10.

The state’s existing medical cannabis businesses are reported to be bleeding red ink. The vertically integrated companies charge that new MMJ businesses would dump product into a market already saturated with medical cannabis.

“We have a metric ton of cannabis that is milled and ready to be extracted into final product,” said Jeremy Unruh, general counsel for PharmaCann, one of the companies filing suit. “But it’s just sitting there because there are no patients to purchase it.”

The health department – which filed its response to the state court suit last week – counters that the new entrants will strengthen the market and build on steps the state has taken to boost patient counts and help the five current companies.

“Additional registered organizations will help to increase patient access, improve geographic distribution across the state, make medical marijuana products more affordable for patients through the introduction of new competition and increase the variety of medical marijuana products available to patients,” the health department said in a statement emailed to Marijuana Business Daily.

Since the addition of chronic pain as a qualifying condition in late March, the number of certified patients has increased by 27%.

Four of five sue

The four MMJ companies filing suit are Bloomfield Industries, Etain, PharmaCann and Vireo Health of New York. The fifth current licensee, Columbia Care, is not participating.

The five companies can own one cultivation facility and four dispensary licenses.

They serve a limited patient base. As of May 25, the health department reported 20,102 registered patients – a fraction of the state’s nearly 20 million people – and 1,033 medical practitioners who can recommend MMJ.

Those five finished sixth through 10th behind the winning license holders in the 2015 application process. They would be phased in over the next two years. The state hasn’t yet decided if the companies will receive cultivation and retail licenses, or just retail permits.

In its court filing response, the health department characterized the MMJ companies’ lawsuit as “seeking a court-imposed monopoly over the state’s medical cannabis market.”

The department also likened the companies’ strategy to “opening a first-of-its-kind car dealership in a busy city, but limiting the number of cars you will sell during the entire lifespan of the dealership no matter how many customers or how much demand ultimately materializes.”

Patrick McCarthy, spokesman for the Medical Cannabis Industry Alliance of New York – which includes all five license holders and filed the lawsuit on behalf of the four companies – scoffed at the department’s response.

“We find it laughable that the department of health tries to paint the current license holders as monopolies,” McCarthy said. “Because right now it’s only a monopoly on hemorrhaging money.”

It’s not yet clear when the court, located in Albany, will take up the case.

Excess production capacity

McCarthy argued any one of the current license holders has enough MMJ on hand to meet current patient demand.

PharmaCann’s Unruh, for example, said his company is using a fraction of the production capacity at its 130,000-square-foot cultivation facility.

“We’re using less than 10% of our production facility,” Unruh said. “If you bring on additional production capacity, you will only serve to upset a very, very fragile industry.”

Underscoring the shaky financial health of the current license holders, Bloomfield Enterprises was acquired earlier this year by MedMen, a California marijuana management and consulting firm. Politico reported Bloomfield had been facing “financial constraints” for at least half a year and was having trouble paying bills.

Various factors weigh on market

Industry experts said New York’s small MMJ patient pool reflects a host of factors, including too few dispensaries. In the more rural areas of New York, an MMJ patient might have to drive 90 miles or more to find a dispensary.

In addition, doctors have not signed up for the program as rapidly as hoped. And the product variety is limited: More popular forms of MMJ like edibles and smokable flower aren’t available. Only smoke-free products such as capsules, liquids and oils can be sold.

Matt Karnes, founder of GreenWave Advisors, a financial research and advisory firm for the cannabis industry, also noted the vast majority of potential patients live in New York City, where the black market is deeply entrenched.

“It’s really hard to compete with the black market in New York City,” Karnes said.

Unruh, for his part, does not oppose the state issuing dispensary – but not cultivation – licenses to the five additional companies to improve patient access and create demand.

“Right now it’s like there’s five people sitting around playing Monopoly, but each person only has $50. You have to continue to go around the board time and time and time again before you can purchase your first house on Baltic Avenue,” he said. “Now all of the sudden there’s going to be 10 people and instead of $50, each of us is going to have $25.”